A growing wave of Japanese capital is targeting Australian real estate as investors look to diversify in the face of increasing pressure to allocate capital to international markets.
It signals a return to the Australian market from one of the richest countries in the world, following investment volumes increasing threefold over the past eight years, reaching more than A$1.6 billion in 2017. This trend continued to gain momentum this year, with Tokyo listed group, Diabiru, acquiring 275 George Street, Sydney for close to A$240 million.
And there is more to come, with Japan’s Government Pension Investment Fund (GPIF), the largest pension fund in the world, sitting on A$2 trillion of pooled funds, with an allocation of five percent to alternative assets, including real estate.
GPIF’s ability to find exposure to real estate has been recently bolstered by new regulation allowing it to deploy capital through funds and limited partnership schemes. As a result, the fund is now preparing to take applications from alternative asset managers for limited partnerships.
GPIF is among a large number of Japanese groups in the early stages of their outbound investment strategies, says Stuart McCann, Head of International Capital in Australia for JLL.
“They are looking to Australia to undertake smaller investments via funds, or by forming separate accounts or clubs alongside experienced local managers in order to grow their knowledge and confidence in offshore markets.”
But their approach will be “considered and measured” as they try to avoid the pitfalls that led to investors withdrawing from overseas markets in the 1990s, he adds.
With the Japanese renowned for their construction expertise, one route they are taking into the Australian market is partnering with developers on a project-by-project basis, as evidenced by the Mitsubishi Estate and Ping An tie-up on Lendlease’s A$1.6 million Circular Quay Tower in Sydney.
Japanese among richest countries
Japan has some of the largest savings in the world, with an estimated A$21.5 trillion of investible wealth. As a result, Japanese government bonds over the 10-year rate is zero percent and the cost of commercial real estate loans are typically priced at 50 basis points all in or less.
The effect of this has been aggressive yield compression to sub three percent, causing its real estate assets at home to be tightly held.
It is mainly these conditions that have prompted a broad spectrum of diversification strategies from Japanese institutions and private investors.
Australia top priority
Nearly US$3.5 (A$4.7) billion of outbound real estate investment left Japan in 2017, 70 percent more than in 2016 and two and a half times the 10 year average to 2016.
Investors are focusing on core office assets, hotels, and large scale development projects in the U.S., Australia, and South East Asia.
With a low-risk, high growth environment, Australia is a “safe harbour”, says McCann.
It is one of only two countries in Asia Pacific with a triple-A Standard and Poors rating, and has generated 27 years of consecutive positive economic growth.
Transaction volumes in Australia’s office sector last year were the third highest on record, according to JLL’s Office Investment Review and Outlook 2018.
Click to read about why Australia is bidding to be top for Chinese capital.